LONDON -- When weighing up a potential investment, we always need to look forward rather than backwards. If you buy a stake in a business, it's the future profits that count -- and the stock market will value your shares based on future expectations.
With that in mind, it can be helpful to review what expert City analysts are expecting a company to earn in the coming years. These expectations can be compared to the share price, to give you a better idea of how the stock market is valuing the business.
Analysts expect National Grid's profits to be 54 pence per share in the coming year. This estimate means that, compared to today's share price of 747 pence, the market is valuing National Grid's shares on a forward price-to-earnings multiple of 14.
Looking ahead, the consensus then calls for National Grid's earnings to return to 56 pence per share for 2015 before climbing to 58 pence in 2016. The data also indicates National Grid's revenues might grow by almost 5% a year over the same time period, from £14 billion to around £16.5bn.
These fairly muted estimates might not explain why the shares of a long-established company like National Grid's appear to be priced for growth. The dividend however, offering a prospective 5% yield, just might. But is the prospect of this generous income opportunity enough to make National Grid shares an attractive investment?
Whether the City's profit projections and the current valuation make the shares of National Grid 'fairly priced' is for you to decide. But if you already own shares in National Grid, you may be pleased to know the Motley Fool's top analyst team have anointed it one of the "5 Shares You Can Retire On"!
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Mark Rogers has no position in any stocks mentioned. The Motley Fool recommends National Grid plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.